18 March 2011 Internal T.I. 2011-0392021I7 - Cost of automobile for subsection 6(2) of the Act

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: In the particular fact situation provided, what costs and charges should be included in the "cost of the automobile to the employer where the employer owns the vehicle" for the purposes of element "C" in the calculation of a standby charge in subsection 6(2) of the Act?

Position: Question of fact, but "cost" in element "C" of 6(2) should generally include all amounts that form the purchase price to the employer for the vehicle, including any additions, options, accessories, fees and taxes thereon (such as GST, HST or PST), net of applicable rebates.

Reasons: IT-63R5 and the ordinary meaning of "cost".

									March 18, 2011

Kathleen Houselander						Tom Posadovsky
Employer Compliance Audit					IT Rulings Directorate
5800 Hurontario St., 6th Floor				Ontario Corporate Tax
Mississauga ON  L5R 4B4						  Division
									(613) 952-8283

									2011-039202

Cost of Automobile for Subsection 6(2) of the Act

I am writing in response to your queries concerning the calculation of the standby charge pursuant to subsection 6(2) of the Income Tax Act. Unless otherwise specified, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the "Act") as amended, and the regulations thereunder are referred to as the "Regulations".

Facts

• An employer purchased a new vehicle from a dealership and traded in one of its owned vehicles for a trade-in credit against the total purchase price. GST was charged only on the net amount after the trade-in.
• The dealership invoice included a provincial tire and battery levy.
• An extended warranty was purchased to increase the warranty period from three years to five years after purchase, or a maximum of 120,000 km.
• The purchase agreement provided for a "finance registration fee", as the employer paid for the vehicle under a financing arrangement.
• A General Motors manufacturer's rebate, which was not paid directly to the employer, was credited as a "down payment" on the purchase contract.

Issue

You wish to know what costs in the fact situation provided should be included in element "C", representing the "cost of the automobile to the employer where the employer owns the vehicle", for the purposes of the subsection 6(2) standby charge calculation.

Our Comments

Interpretation Bulletin IT-63R5, Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - after 1992, and the T4130 Employers' Guide - Taxable Benefits and Allowances 2009, provide the Canada Revenue Agency's views on the calculation of the standby charge, which represents the benefit conferred on an employee when an automobile is provided by the employer and available for the employee's personal use.

Paragraph 12 of IT-63R5 explains (in part) that "The cost of an automobile to a person who is an employer, or a person related to the employer, for the purpose of the calculations under subsections 6(2)... is the cost to that person, including provincial sales tax, notwithstanding that the capital cost on which the person may claim capital cost allowance ("CCA") may be reduced under section 67 to a reasonable amount, or may, if the automobile is a passenger vehicle, be limited under paragraph 13(7)(g) or (h) to a maximum of $20,000 or such other amount as may be prescribed" (emphasis added).

According to the T4130 - Employers' Guide: Taxable Benefits and Allowances, if an automobile is owned, the cost of the automobile for determining the standby charge is the total of the following two amounts:

1) the purchase price of the automobile, including any options, accessories, and GST/HST and PST, but not including any reduction for trade-in; and
2) the cost of additions (including GST/HST and PST) made to the automobile after it was purchased (added to the capital cost of the automobile for depreciation).

In your situation, the cost of the automobile for the purposes of subsection 6(2) would include the full GST/HST and PST payable, but would not include any reduction to the amount payable from a trade-in credit. Note that any specialized equipment added to the automobile to meet the requirements of a disabled person or for employment purposes, such as cellular phones, two-way radios, heavy-duty suspension, and power winches, are not considered to be part of the automobile's cost for purposes of calculating the standby charge.

Levys, Fees and Other Charges

The Act does not define the term "cost", which takes its meaning from jurisprudence and ordinary commercial principles. Generally, we consider an item's "cost" to include the amount laid-down to acquire it, including all legal, accounting, engineering or other fees incurred. These comments are consistent with Generally Accepted Accounting Principles, which require that in addition to the purchase price, the recorded cost of a tangible capital asset should include all costs necessary to put the asset in a position to be used. Accordingly, the provincial tire and battery levy would be included in the employer's cost of the automobile for the purpose of the standby charge.

Extended Warranty

IT-417R2, Prepaid Expenses and Deferred Charges, explains that a prepaid expense occurs where an outlay or expense has been made or incurred by a taxpayer in a particular taxation year and it represents, for example, all or part of the cost of services which will be provided to the taxpayer after the fiscal year end. It is our view that an automobile extended warranty is a prepaid maintenance agreement purchased from the manufacturer or a third party warranty provider. As explained in paragraph 9 of IT-417R2, "Where expenses incurred in one year are to be deferred and written off over one or more subsequent years, the number of years in the amortization period should reasonably reflect the duration of time over which the benefit is expected to accrue". We therefore agree with the comments put forth in document 9505997. The cost of an extended warranty in respect of an asset used for business purposes should be amortized over the period of the warranty and not included in the employer's cost of the automobile for the purposes of subsection 6(2) of the Act.

Financing Fees

IT-341R4, Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate, and Expenses of Borrowing Money explains that pursuant to paragraph 20(1)(e) of the Act, certain financing fees on a loan to buy or improve property are deductible in equal amounts over a five-year period. Under certain circumstances, where a taxpayer borrows money for the purpose of acquiring depreciable property, and incurs expenses in the course of borrowing that money that would otherwise be deductible under paragraph 20(1)(e), the taxpayer may elect under section 21 of the Act to capitalize these expenses along with the interest paid or payable on the borrowing. However, this election is restricted to the determination of "capital cost" for CCA purposes and does not affect the employer's "cost" for the purpose of subsection 6(2) of the Act. Consequently, the financing fees in your scenario are deductible in accordance with paragraph 20(1)(e) of the Act and not included in the determination of the employer's cost for the purposes of the standby charge.

Rebates

Although it does not specifically address rebates or assistance received in respect of an employer's "cost" for the purpose of subsection 6(2), paragraph 13 of IT-285R2, Capital Cost Allowance - General Comments, provides our position on assistance received and its affect on the "capital cost" of property:

"Generally, the capital cost of property is incurred by a taxpayer if the expenditures or outlays for the acquisition of the property are met by the taxpayer. On occasion, however, a taxpayer in question may receive or be entitled to receive some form of assistance for the acquisition. If any form of assistance is received, the capital cost of the property for which it was received may have to be reduced or the amount of the assistance included in income."

Similarly, it is our view that certain rebates, such as the GM rebate you described, will reduce the cost of the automobile to the employer where the employer purchases the vehicle, the rebate results in a reduction to the purchase price, and the rebate is available to anyone purchasing the particular automobile. Note that a rebate resulting from, for example, points accumulated on a GM credit card that entitles the bearer to a discount on a vehicle, would not reduce the cost because such points are regarded as a cash equivalent (2006-0175841E5).

It was brought to our attention that in document 2008-0276661E5, we opined that where an employer was in receipt of a government rebate in respect of the lease of a fuel efficient vehicle, the assistance received should be included in income be virtue of paragraph 12(1)(x), and the rebates received would not affect the lease standby charge calculation in subsection 6(2) of the Act. We must point out that in this situation, the rebate was paid by the government directly to the employer and it did not reduce the amount "payable by the employer to the lessor", which is the wording used in element "E" of the reasonable standby charge formula in subsection 6(2). There is no such wording in element "C" in subsection 6(2) in respect of a purchased vehicle.

We hope that our comments will be of assistance to you.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

c.c.: Sue Leblanc, Senior Program Officer
Policy and Legislative Research